More about the pros and cons of microfinance

In this post I excerpted some articles about the problems with microfinance. See also this 2011 post by David Ruccio. Today a little more about this, also thanks to commenters Morgan and Bateman.

A) Microfinance can be beneficial as shown by Colvin and McLaughlin who investigate farmers cooperative banks around 1900 (when the rise of chemical fertilizer and an increasing use of other purchased inputs caused liquidity problems for many small farmers’. They show that the board members of these very local savings banks were as a rule not paid. Also: `What was the recipe for the success of Raiffeisen’s banking model? What made it possible for imitations of this German rural cooperative microfinance institution to work well in some European countries, but fail in others? This paper answers these questions with a comparison of Raiffeisenism in Ireland and the Netherlands. Raiffeisen banks arrived in both places at the same time, but had drastically different fates. In Ireland they were almost wiped out by the early 1920s, whilst in the Netherlands they proved to be a long-lasting institutional transplant. Raiffeisen banks were successful in the Netherlands because they operated in a niche market with few viable competitors. Meanwhile, rural financial markets in Ireland were unsegmented and populated by long-established incumbents, leaving little room for new players, whatever their perceived advantages. Whereas Dutch Raiffeisen banks were largely self-financing, closely integrated into the wider rural economy and took advantage of socioreligious division, their Irish counterparts did not´.

B) That was then. Now, board members of present day so called micro finance institutions, like FINCA, are paid. A lot. And try to con you about this. In the previous blogpost about microfinance and microsaving an article of Norbert Haering aboutFINCA, a provider of microcredit, was excerpted. FINCA responded to Haering, who posted it on his blog (the German version including his remarks). IMNSHO: the response of FINCA is insultingly stupid. They dear to state, about the remuneration of the FINCA boss, “In FINCA’s 2014 IRS Form 990, which we published last week, the CEO compensation number that you cite ($1.4 million) does not reflect the actual 2014 salary received by Rupert Scofield and, in fact, he did not have a salary increase. The actual gross salary in 2014 was $415,547. This is noted in the detail of the Form 990. The $1.4 million “total compensation” includes future retirement income and taxes that the Internal Revenue Service requires to be reported in the year of vesting in the retirement plan, which for Rupert Scofield was 2014. No cash was paid to him over and above the gross salary mentioned above.” Translated: the IRS is daft and insincere, accountants are daft and insincere and you are daft and insincere as you all understand that money not directly paid to mr. Scofield but squirreled away on a saving account belonging to mr. Scofield part and parcel of his $ 1,4 million (or $1,40 per FINCA client, quite a lot considering the $1,90 a day poverty threshold) “total compensation”. Such a statement alone, written as an apology and clearly intended to con people, makes one already distrust FINCA.

C) Which reminds us of payday lending. I never knew about payday lending (it does not exist n my country) until I read about it some years ago. Which shows that it is not a market failure but a government failure as absence of trustworthy banks leads people to pay day lenders. As is already clear from the Wikipedia entry on this: ´Payday lenders do not compare their interest rates to those of mainstream lenders. Instead, they compare their fees to the overdraft, late payment, penalty fees and other fees that will be incurred if the customer is unable to secure any credit whatsoever.´Which are often even more costly than the ridiculous pay day lending rates.

D) Milford Bateman describes this failure in detail for South Africa where what’s called ‘microfinance’ is little else than payday lending, loansharking and usury. But he also underscores the importance of credit to development and shows how many local based banking systems performed well: ‘But there is, thankfully, an important silver lining to all this wanton destruction, which is that the policy space is now more open than ever before to local financial system alternatives that prioritise a local community’s need for sustainable jobs, decent incomes, and human solidarity and mutual support, rather than attempt to satisfy the greed of bankers, investors, speculators, corporate raiders, and hedge fund managers‘. I’m investigating pre-bank historical rural credit at the moment which also shows the importance of credit to the survival of many households (which were often much more a unit of production than today) as well as the local nature of many pre banking credit systems.

E) Wendy Olsen and Jamie Morgan state, based upon long term in depth research of Indian villages, that micro finances (in this case provided by NGO’s) surely can lead to overindebtedness but might also help people escape situations of debt servitude. There clearly are different kinds of microcredit. Local systems based on local savings seem to function well. No need for global finance.

The real question is whether micro-finance helps some people who get loans–some kind of poverty alleviation—or they are a good way to improve the economy of a neighborhood, region or some other type of location. My own work suggests that they do help some people–although not as many as claimed, but do not have much effect on the economy of the community in which those helped people live.
The next question, then, is this the best way to allocate development funds.

Its also important to restate that even though microcredit is now very much all about enriching the tiny number of elite suppliers (shareholders and CEOs) far more than the receivers (the global poor), this does not mean that on occasion we can’t find some positive impact with regard to a few select poor individuals, say in some Indian villages. The microcredit institutions thrive on these anecdotes, in fact, which have been termed ‘donna maria stories’. But finding a few positive cases and concluding that microcredit might therefore be positive for everyone (for society as a development intervention) is flawed logic. Its akin to finding a few winners at Sands Casino in Las Vegas and concluding (wrongly) that gambling might therefore be positive for everyone, so lets bus the poor to the nearby casino and poverty will soon be eradicated. The fact the microcredit industry today relies increasingly on such isolated cases as ‘evidence’ of its development effectiveness, now that so many US-based academics who once celebrated microcredit are now sheepishly reporting there is actually no impact (see this utter nonsense response to this, for example:

One little anecdote about this: some years ago I was with some people in de Zuiderzeemuseum, an open air museum which shows a coastal village of around 1900 (early May, when the appeltrees blossom, is the best time to go). In the living room of one of the houses the creditor/debitor book of the local Raiffeisen bank (a book which was often kept by the local schoolmaster) could be seen. It was from the remote village of Wommels. To our surprise one of the people jumped over the rope which had to keep us out of the living room, started to look into the book and after a surprisingly short time stated ‘Ha, mien Paake” (Ha, my granddad!”. His granddad was one of the debtors in the book… That was the scale of this kind of banking: a local communicty, a schoolmaster, a big book and a small vault with money. And one hundred years later it was still more personalized than present day digital banking….

Aside – just this week the remaining 106 local Raiffeisenbanks in the Netherlands (all part of the RABO cooperation) merged into one big bank, partly because of a an increased regulatory burden. 9.000 jobs are axed in the process.

Dear Merijn, interesting book, thanks. Actually I was just referring to the German cooperative system which many microcredit enthusiasts try to link to microcredit to provide some false glory and heritage for their model.

The anecdote is telling. The Dutch community coops you refer to (like the German ones) were indeed of great benefit to ordinary folk, because they were all about local development, and they were formed and controlled by the community with the aim of helping the community by recycling value within the community, whereas so many of today’s microcredit institutions are all about siphoning value out of the community into the hands of CEOs, shareholders and others.

Sorry to hear the final comment about the local Raiffeisenbanks being merged into a bigger bank with associated job losses. I this part of the disappointing corporatisation of the coops, or simply a needed economies of scale issue I wonder.

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